TOKYO/HONG KONG: Speculation the Bank of Japan may wind back its monetary stimulus this year gripped markets on Tuesday after the central bank trimmed the amount of its purchases of Japanese government bonds.

Traders appeared to latch on to the BOJ announcement that it will buy less of the long-dated bonds, sending the dollar down about 0.5 per cent against the yen and the longer dated 20- and 40-year bond yields up to their highest in a month.

While the move was in line with the BOJ’s subtle reduction in its bond buying, the so-called ‘stealth tapering’, traders said it highlighted how sensitive markets are to a pullback in the massive stimulus that has been the centre piece of Prime Minister Shinzo Abe’s ‘Abenomics’ policies of the past 4-1/2 years.

“This goes to show that the amount of attention being given to the word ‘tapering,’ or any action from the BOJ in that direction that could be taken as a suggestion of it, there’s a lot of sensitivity around it,” said Bart Wakabayashi, branch manager for State Street Bank in Tokyo. BOJ Governor Haruhiko Kuroda has repeatedly dismissed the chance of withdrawing stimulus any time soon, even as some policymakers have recently expressed concerns over the perceived demerits of monetary easing, especially the hit on financial institutions’ profit margins.

That has led to speculation that the central bank may have to consider raising its yield targets or slow purchases of risky assets later in 2018 and bringing Japan in line with a host of developed nations which have started to tighten policy, partly thanks to a synchronized uptick in global growth.

The Federal Reserve raised rates three times last year, while the Bank of Canada tightened policy for the first time in seven years and the European Central Bank has signalled it could start to taper soon.

The BOJ pledged in 2016 to guide short-term interest rates at minus 0.1 per cent and 10-year bond yields at around zero per cent.

It also keeps a loose pledge to increase its bond holdings at 80 trillion yen ($710.29 billion) per year, although the actual increase was only around 58 trillion last year, which some investors see as an effective tapering of the BOJ’s stimulus.

On Tuesday, markets were surprised by the central bank’s decision to reduce its purchases of JGBs with 10 to 25 years left to maturity as it was the first cut in that tenor in more than a year.

In all, the BOJ cut buying of 10 to 25 year bonds and 25 to 40 year paper by 10 billion yen ($88.39 million) each, from its previous operations, to 190 billion yen and 80 billion respectively.

Reuters